Questions and answers 2

This is the second Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about modern monetary theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the regular blogs under this category (Q&A) because it is likely it will be addressed in some form here. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.
It seems that a host of questions were spawned by the two simple teaching models (STMs) I have put up in recent weeks – Barnaby, better to walk before we run and Some neighbours arrive.

Let’s assume there is no gov’t other than currency and debt. That is G=0 and T=0. What would the model look like?

The cards are fiat currency.

If G=0 and T=0 and there were no other central bank transactions with the non-government sector then there would be no fiat monetary system. There would be no transfer of private resources to the public sector. That is the purpose of the STMs – to show how these transfers work.

Question 2:

What effect do bank loans and asset inflation have on this? For example, a bank gives someone a loan to buy a house, which they later sell for a profit and pay off the loan. Is that resulting profit ultimately only a product of government deficit spending, is it ‘funny money’ based purely on the perceived value of the house, or has ‘money’ actually been created by the non-government sector?

This question is covered in the trilogy of blogs noted above. In short, the STMs are designed to highlight the vertical transactions between the government and non-government sector and ignores what we call the horizontal transactions between entities in the non-government sector (which include bank loans and real asset purchases etc).

Why do this? The reason is the vertical transactions are special and have characteristics not found in any of the horizontal transactions. Specifically, vertical transactions (such as government spending, taxation, foreign exchange interventions, gold sales) can create and destroy net financial assets in the currency of issue. That is the net position in the non-government sector is altered by the vertical transactions whereas the horizontal transactions within the non-government sector cannot alter the net position.

They can redistribute assets and liabilities but all the horizontal transactions net to zero. The horizontal transactions are not uninteresting and important to study but I find that most commentators and interested parties do not understand the nature of the vertical transactions at all and they are at the basis of how the currency functions.

The STMs are designed to highlight the exact nature of these vertical transactions and allow you to clearly understand two important features about the actual which are usually absent in mainstream debate:

That all flows have to consistently add to stocks at the end of each period – for example, saving (a flow) adds to wealth (stock);

The sectoral flows between the government and non-government sector sum to zero. So a government deficit must be equal $-for-$ with a non-government surplus (saving).

The latter point then allows us – in an expanded form by decomposing the non-government sector into private domestic and external – to understand what many commentators do not.

First, if there is an external deficit (net exports negative – exports less than imports) then there is a net leakage from the expenditure system.

Second, under these circumstances it is impossible for the remaining sectors (government and private domestic) to both be in surplus. Please read that as impossible. This is not my opinion or a forecast or a contingency.

It is impossible as a consequence of the way the national accounts are designed and calculated. Why is this important?

If you understand the relationships at this basic level – an understanding which is the STMs are aiming to provide – then you will be better able to sort out myths in the public debate.

For example, next time you hear a commentator claiming that we need public and private de-leverage when the nation they are discussing has an external sector deficit you will realise they don’t know what they are talking about.

Next time, you hear the deficit-terrorists calling for fiscal austerity and a move back into surplus in a nation with an external deficit you will understand that this strategy would push the private domestic sector into deficit – that is, dis-saving. The only way the private domestic sector could maintain spending growth under these circumstances would be to increase its level of indebtedness – exactly what has brought us unstuck in the current crisis.

Such as growth strategy is unsustainable and will plunge the economy into recession and the public budget back into deficit via the automatic stabilisers.

The STMs allow you to understand these relationships. That is all they aim to do. But getting that level of understanding is crucial for understanding other aspects of macroeconomic behaviour and that is why I focused on it in the models.

Many people just cannot cope with the idea that budget deficits are required to underpin private domestic saving when there is an external deficit. They have such a hatred for government that they go into denial at this point. The STMs show that whether these people like it or not that is an operational reality of the system they live in.

Finally, it is important to always keep in mind that I am a macro economist. So I am concerned with the position of overall sectors not those of any one individual. So when I say the private domestic sector is in deficit (and dis-saving) it doesn’t mean a private individual is not able to save. Clearly they can – but in aggregate they cannot save if the government is running surpluses when the external sector is in deficit.

Question 3:

What is your opinion that Rogoff and Reinhart as well as Niall Ferguson’s research and books that reach the conclusion that eventually printing currency leads to inflation and effective default on fiscal debt by currency debasement?

All of this gets back to the practical drawback of deficit spending and monetary QE and MMT – since the economy is composed of millions of people and billions of transactions and a few control the credit channel, these cannot be effectively targeted. Financial regulatory reform is incapable of preventing malinvestment. Ergo, inflation will eventually result. This isn’t to undermine your theory, which is far better in explaining the modern fiat monetary regime than arcane gold standard based theories, but to suggest that its application in practice remains out of reach of the world.

It doesn’t resemble the process that governments which are sovereign in a modern monetary system go through when they spend. Governments in our economies (barring those that have imposed gold standard/fixed exchange rate type restrictions on themselves) spend each day by making adjustments to the banking system. There is not “printing” going on at all unless you trivialise to mean someone printing of a bank statement to record what they have seen on their computer screen.

The additional reserves – which result after all the transactions that have followed the government spending are completed – do not constitute any inflation threat at all.

If the government was to continue spending so that nominal aggregate demand is pushed beyond the real capacity of the economy to respond to it (in output) then inflation will result. Price pressures may result in certain sectors prior to full capacity being exhausted.

But why would a government seek to drive the economy past that point where full employment is achieved? I cannot think of any reason yet Ferguson and his ilk seem to think governments have a financial constraint and they can use inflation to reduce their debt burden in real terms.

But the debt burden on a government is illusory when compared to a debt burden arising from private debt. In the latter, the debt holder has to forego consumption to repay the debt and service the interest payments during the life of the debt. For the government, there is no such constraint – they just credit bank accounts whenever interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school.

Ferguson’s claim is thus nonsensical in a fiat monetary system. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? The answers to all these questions is a resounding no!

Macroeconomic contraints are more powerful than any. This is often forgotten by commentators. An aggregate demand constraint imposed on the non-government sector can choke speculative bubbles much more quickly than a process whereby monetary policy authorities cause the cost of credit to creep up.

First, the monetary policy route is unreliable because of the distributional aspects. When interest rates rise, debtors lose but creditor gain. Those on fixed incomes gain. What is the net spending effect within normal interest rate ranges? It is difficult to judge. The Australian Treasury has reported that fiscal policy expansion in the current downturn was much more effective than the RBA’s decision to cut interest rate to relatively low levels.

Second, while there might be “millions of people and billions of transactions and a few control the credit channel” imposing a fiscal constraint on their activities is likely to choke them off – that is how an aggregate policy works. The collapse of credit (bank loans) in the current crisis is a testament to that.

Specific asset classes can be targetted with fiscal policy via taxation and/or spending initiatives to discourage or encourage activity in that sector. Monetary policy cannot be targetted to specific asset classes and impacts broadly and bluntly on all spending and regions.

So the claim that inflation is an inevitably is based on false premises and you can usually steer the person back to some version of the Quantity Theory of Money even if the person has never heard of the now discredited theory of inflation. I have discussed the QTM in the blogs referred to at the outset of this section. The QTM is flawed and is clearly irrelevant to economies with underutilised capacity.

Question 4:

If I’m reading this correctly, it appears that the national debt is held onto. Doesn’t it usually get spent so that the government needs to earn back both the principal and the interest?

The national debt is just the outstanding public debt held by the non-government sector (with some held by the central bank). It is a stock and reflects the wealth of the non-government sector held in this form.

It arises because governments operating fiat monetary systems have hung onto gold standard practices to voluntarily constrain their spending – that is, they issue debt $-for-$ to match their net spending. The debt is not to “finance” their spending because they are not revenue-constrained.

From an accounting perspective, the stock of debt is an expression of the cumulative budget deficits that have been run by the government in past years. Budget surpluses work in the opposite way – to undermine the growth in wealth held in the form of public bonds.

The government never has to “earn” the principle or the interest it pays on outstanding debt. In a fiat currency system, public spending does not come from anywhere – in the sense, that there is a stockpile of funds they spend out of. The government neither has or doesn’t have any money. It is an inapplicable concept when related to a sovereign government.

A household has or doesn’t have funds because they are financially constrained.

Question 5:

Idealized models look great in an insular economy in which there are no cross-border flows and no trade … but the model … fails to recognise that the central premise – that the government has effective control of monetary value (via the tax and legal tender function) becomes void at the border of that nation.

The first model – Barnaby, better to walk before we run – deliberately didn’t split the non-government sector into an external and private domestic in order to show the most simple sectoral relations and applications of stock-flow consistency.

A few days later to address concerns such as expressed in this question – I am being kind calling it a question – it was really just an uninformed assertion – I developed the partner model – Some neighbours arrive .

This incorporated an exchange rate and cross-border flows and broaden the national accounts to incorporate net exports.

What did we find? Nothing of consequence changes. Instead of government and non-government accounting balances having to concord we now have the three sectoral balances having to obey accounting constraints.

The stocks and flows work identically – we just have some more flows (exports and imports) and recognise that the external sector can accumulate financial claims on us in our currency if they are willing to net export to us.

We also derived the powerful result – if there is an external deficit, then the private domestic sector can only save if there is a public deficit.

The government maintains control of its currency in a fiat monetary system whether the borders are opened or shut. No-one else can add or subtract net financial assets in that currency as a result of policy interventions.

Why keep taxes at steady at 600 cards while trying to lower the “national debt”? Aren’t neo-liberals always arguing for lower taxes in addition to lower government spending?

Simply to ensure not too much is changing at once so that the reader can isolate more accurately what is going on. It is the net position of the public budget that matters and that can be altered in a number of ways.

Neo-liberals are arguing for lower tax rates which means in my model I would have had to cut employment even further to achieve the budget surplus I mindlessly pursued.

Question 7:

Isn’t the whole conservative/neo-liberal argument that the “kids” should not be looking for the government to provide most or even any of the goods/services that the 600 cards provides – that is, to “eat and live in the house”? Wouldn’t they say that the kids could/should be supplying/demanding those goods/services from each other, and so would have had no need to earn the government’s cards in the first place? Or, very much fewer of them at the least?

You have to see the model for what it is. It is abstracting from the transactions within the private economy that do not involve the government. It is doing that for the reasons I note above – to highlight the government relationship with non-government.

So in this “economy” if the kids declined to accept the government spending they would not be able to pay their taxes. The government has to spend at least as much as it taxes in its own currency to ensure that the private sector has the capacity to pay the taxes without reducing their saving.

That is what the model teaches you. It is am important lesson that most people who commentate on these matters fail to understand.

Whatever else the kids do – between themselves – it still remains that the non-government sector has to interact with the government sector to get their currency in aggregate.

Question 8:

If the kids represent the entire private sector as presented in the vertical graphic at the top of the page, then isn’t a system where the government pays all wages and determines the tasks to earn those wages describing a completely centralised, government directed economy … i.e., communism, or something very like it?

Imagination is a good thing. Abstraction requires imagination. The STMs are abstractions. The slither of the real monetary system represented by the transactions shown are as they occur in the real world – in an accounting sense and in a stock-flow sense. Some people have picked at the use of a poll tax etc. But these are simplications to make it easier to expose the stock-flow consistency and the national accounting relationships in a few thousand words with a 6 column table.

The level of detail presented and assumptions used are just enough to make my point.

But if you imagine a whole private sector tacked onto this model then you might have a very small public sector interacting with a very large (as a proportion of total income) private sector. The results I derive would be the same.

So this has nothing to do with the size of the government but rather its role!. Bringing in emotives such as communism is just missing the point altogether.

Question 9:

What happens when deficits balloon?

They balloon! But then that doesn’t get us very far because we do not know what balloon means. It is one of those weasel words that people use to invoke an irrational reaction from their readers.

If you mean – what happens when net public spending pushes nominal aggregate demand beyond the real capacity of the economy to respond to it (in output) – then the answer is obvious – inflation will result.

But the claim usually relates to continuous net spending positions over a long period.

In summary, continuous budget deficits are the norm for a nation where the private domestic sector desires to save (spend less than they earn) and the external position doesn’t offset the decline in demand associated with this. History shows us that these continuous deficits do not “blow out” or generate accelerating inflation.

Question 10:

In the STMs I made the point that: “If the budget is balanced there can be no net saving or net accumulation of financial assets”. This induced the following question.

Assuming no debt, does that mean there is no private spending either?

No it doesn’t assume anything about private spending. The non-government sector overall cannot alter its net financial position by transacting internally. It can redistribute assets and liabilities within the non-government sector but cannot change the overall position.

Only transactions between the government and non-government sector can change the net financial position in the currency of issue of the non-government sector. It is crucial to understand that point if you want to really get to the bottom of the way the monetary system operates.

So the STMs do not include private spending because it doesn’t shed light on the way the government can change the net financial position in the currency of issue of the non-government sector – which is the main purpose of the STMs.

Question 11:

If you’re suggesting that because sustained surpluses don’t work then it implies that sustained deficits must then work. This seems clearly and obviously wrong, and I don’t even think it’s your point – but it is what “we” non-MMT’ers hear (correctly or incorrectly) when MMT practitioners argue against reducing the deficit – we hear “the US doesn’t need to balance their budget because government debts are different from household debts, the government doesn’t need to fund its spending with taxes or debt, and surpluses lead to bad things.” We turn around and reply “but that doesn’t mean we can accumulate endless debt and deficit – it has to end badly at some point” – IN THE REAL WORLD!

Whether any particular fiscal position can be sustained depends on what else is happening in the expenditure system and the growth of productive capacity.

For a country (such as Norway), which is currently running very strong net export positions, the government has to run surpluses or else aggregate demand would be so strong that it would outstrip domestic productive capacity and inflation would result. For them, they can have full employment (or very nearly), strong public sector services, high material standards of living and high private saving ratios and still run a surplus continuously.

But that model cannot apply to all countries because for external surpluses have to be offset elsewhere by external deficits. Most advanced nations now run external deficits.

In that case, to repeat what I said above – the only way the country can maintain growth strong enough to sustain full employment and rising standards of living without requiring its private sector to go increasingly into debt is for the government sector to run continuous deficits. You may not like that implication of the market system but it is then a case of “like it or lump it”.

I emphasise again that this is not my opinion or a forecast. The statement reflects the sectoral accounting constraints that all economies obey. There is no discretion.

So if non-MMT’ers don’t understand that then they cannot claim to speak with any authority about the way national accounts work, or how stock-flows consistently deliver these sectoral relationships and … ultimately, they cannot speak with any authority about how the monetary system we live in operates. It is as simple as that!

Further, no debt is endless. It always gets paid back on maturity. But the flows of net spending (deficits) can be endless as long as they promote real output and income growth and support private saving desires.

When have continuous deficits under these conditions ended badly? I have studied this stuff for years and I cannot find a single actual example of continuous deficits under these conditions ending badly – IN THE REAL WORLD (sorry for shouting at you all!).

It is always important to separate out the emotive responses to things that are presented to us with the reactions that are based on what we actually know as experts. Too often these sorts of questions are based on the former and upon further examination you quickly find out the questioning person doesn’t know much at all.

Question 12:

What makes the Chinas’ kids eager to work for foreign currency in their neighbor’s household? Maybe they have some spare time which they prefer to spend working second job, and they weren’t able to find such in their own household? What makes the foreign business cards valuable for them as they don’t need them to pay their own taxes – the possibility that they can exchange it for domestic money?

This relates to why nations are prepared to net ship real goods and services to other nations which could be enjoyed by their own citizens. It is always to build a portfolio of financial assets in the currency of the nation that is enjoying the excess of imports over exports.

Why would a nation want to do this? For many reasons mostly related to positioning itself in world trade.

The reason our cards are valuable is because at some later date they can be exchanged for net goods and services that we produce which the next door neighbours may enjoy – in the STMs – our labour. They can make real claims on our resources if they have financial assets denominated in our currency.

Question 13:

I often will say something along the lines of – for sovereign governments the financial “costs” are not worth considering” – because only real costs matter and a sovereign government cannot become insolvent.

This sort of rhetoric prompted the following question:

But as many governments do not issue their own currency and instead farm it out to private central banks, how are the interest payments on government deficits accounted for? Is this simply considered a leakage to the private sector?

I ask because it would just seem to me that while a sovereign government is in fact solvent, deficits in the end have the larger effect of simply padding the coffers of private individuals that are shareholders of central banks.

The exact “real world” way in which central banks and treasuries account for their dealings varies between nations. The US Federal Reserve system, which is privately owned, is rather unique in the world. Most central banks are set up as acts of statute.

However, all are controlled in one way or another by the elected government of the day.

But from an operational perspective it is always the case that the central bank and treasury operations should be seen as part of the consolidated government sector in that represent a vertical relationship (as explained above) with the non-government sector.

So a central bank gold purchase will add monetary base to the non-government sector (that is, add bank reserves) in just the same way as treasury spending will. From this perspective an interest payment on debt adds income to the non-government sector.

The distributional issues you raise – who owns the central bank etc – are separate from these macroeconomic considerations. They may be important from a political perspective but are tangential to my macroeconomic concerns.

Question 14:

Several people have been querying the operations in the Eurozone nations given the recent exposure of the Greek situation. The issue that seems to be driving uncertainty or confusion relates to whether a government in the EMU can make vertical transactions (that is, transactions with the non-government sector which create/destroy net financial assets in the currency of issue). The currency of issue in this context is the Euro.

So the following question is representative.

Does the STMs and MMT in general hold true for a country like Greece that does not have a sovereign currency and so government cannot spend money/reserves into existence?

Someone else asked whether the Greek government spending is a vertical transaction. It is the same issue really just a different way of approaching it.

What MMT tells us is that when a sovereign government spends it creates bank reserves (via central bank crediting reserves to bank accounts) which it at some future time collects as taxes and bond sales proceeds. This is what I have been referring above as vertical transactions.

We also know that when commercial banks extend credit (loans create deposits) these horizontal transactions net to zero because for every asset created their is an offsetting liability being held by someone else.

An EMU nation is like a state in a federal system such as California, New South Wales etc and is constrained accordingly. With a fixed exchange rate with the rest of the Eurozone, and a flexible exchange rate with the rest of the world the fiscal position of an EMU nation is constrained in a similar way to that of a gold standard nation.

When an EMU nation or any government borrows in order to spend (which is how the gold standard constraints worked), we consider its “savings” of financial assets falls and, in aggregate, the “other sector’s” net financial assets in the currency rise.

Some steps in this process will help us understand it better.

When a person buys bonds from an EMU government, their financial assets are unchanged because Euros are exchanged for bond entitlements.

For the EMU government their financial assets are also unchanged until they spend the funds. Then they reduce their financial assets while the stock of financial assets of the recipient of the spending rises.

An EMU government can also tax if its tax base is not mobile in the currency issued by the ECB. To get the Euros necessary to pay the tax a Greek (or whatever) taxpayer has to:

Net export to another nation and get Euros;

Be in receipt of Greek government spending; and/or

Borrow euros from somewhere.

The financial asset implications then are extrapolates as above.

Question 15: Productive work etc

There were many people who wanted to extend the STMs into a debate about productive work and somehow wanting to tie this into the inevitability of asset bubbles.

So a typical question was:

What I remain unconvinced is that the government spending will be targeted to productive uses (at the margin maybe, but doesn’t seem to be the case in majority of the cases) rather than creating asset bubbles.

And then there was this sort of concern:

You also made a reference to “productive capacity” Trying to bring it back to real world relevance again: I’m still confused as to what you are suggesting in terms of full employment as it relates to the USA. Would it be okay if the government paid all unemployed people to dig holes and fill them in again? Or do the jobs have to be “productive”. If the jobs don’t have to be productive, then instead of paying people to dig holes and fill them in, why not just pay the people to sit at home and do nothing? Would it be okay if the government spent a billion dollars creating jobs that produced a fraction of that in “capacity”?

For the purposes of understanding the message of the STMs, it is irrelevant what the kids do. They might just go out and dig and fill in holes. That wouldn’t alter the national accounting and the stock-flow relations. But when I have stacks of other things I would want them to do including activities that will transfer skills to them which will be of later use why would I be so unimaginative?

But the discussion broadens.

First, the term “productive” is loaded. Neo-liberals claim that only the market can determine what is productive. But the current crisis must surely reinforce the view that the market fails in spectacular ways and destroys massive amounts of real value when it does.

Second, even mainstream textbooks acknowledge the concept of social costs and benefits and the fact that purely private calculations (costs and benefits) will under- or over-allocate resources when social costs and benefits are present in particular configurations.

We are taking a very narrow view of “productive” activity if we confine the concept exclusively to working for private profit.

There are many activities that go beyond the “private profit domain” that add value to a nation.

The claim that public sector job creation is always unproductive is a long-standing claim. Please read my blog – Boondoggling and leaf-raking … – for more discussion on this point.

In that blog I demonstrate that the term – boondoggling and leaf-raking – it meant to be the ultimate put down by the conservatives who laud the virtues of the private sector as they create hundreds of thousands of low-skill, low-paid, precarious and mind-numbing jobs but hate, with an irrational passion, the idea that the public sector could employ workers that the private sector doesn’t want and get them to work on community development projects at a minimum wage.

And to put a finer point on it … on projects that can leave massive positive legacies to all that follow.

I document the debate that occurred in this regard during the Great Depression. They realised then that with the private sector in full-scale retreat from job creation, the only remaining source of job creation was the public sector.

This remains the same now!

Were the large-scale programs successful? My understanding of the historical data is that the initiatives were extremely important in building infrastructure and protecting families and their communities.

The facts are clear. The Public Works Administration (PWA) created hundreds of thousands of jobs and the work helped restore ageing public infrastructure (such as, roads, dams and bridges). Many new buildings were constructed during this period (schools, recreational spaces, libraries, hospitals) and have delivered benefits to the generations that followed.

Around 8 million workers on construction and conservation projects and most of the workers were low and semi-skilled, the hardest hit by the Depression. The projects included “building athletic stadiums, making books for the blind, stuffing rare birds and improving airplane landing fields and army camps.”

The WPA engaged “Thousands of unemployed writers, actors, musicians and painters were given an opportunity to earn a modest livelihood from their artistic talents … and to enrich the lives of countless culturally-deprived citizens. The productions of the WPA Theater Project, for example, entertained a phenomenal audience totaling 60 million people, a great many who had never before seen a play.”

Further, targetted programs to engage American teenagers were organised under the Civilian Conservation Corps (CCC) which employed around 2.7 million jobless male teenagers. Kelber reports that they worked to “reclaim government-owned land and forests through irrigation, soil enrichment, pest control, tree planting, fire prevention and other conservation projects.”

There are huge reminders of the legacy of this era of public intervention by way of direct job creation. I can document similar things for Australia.

Just the act of providing a job is productive when you consider the overwhelming evidence that children who grow up in jobless households inherit that disadvantage themselves. It is thus productive for the “kids” to see their parent(s) leaving for work each morning. These observations are taken into adult life and make a difference to their opportunities and outcomes that those kids will experience.

When considering “productive” one must think laterally and broadly.

Further, my actual practical work as an economist in developing countries in recent years, demonstrates without a doubt the massive benefits that public sector job creation programs deliver to local communities and the nations in general. I wonder if the people who have asked these questions have had any such experience.

Question 16: Ideology etc

And finally tonight, I come to the issue that the STMs are really a front for a “collectivist”, “stalinist”, “communist”, “dictatorial” and more type of system where unproductive (see Question 15) work is forced onto the powerless population.

So one rather insistent commentator said (several times):

Whether or not government should ensure full employment comes down to your view of what governments’ role should be in an economy/society. I agree with you in that I don’t think the government should be deciding how to keep the economy at full capacity. The Soviet Union operated at full capacity for a long time but they eventually discovered that the capacity was poor, the product poorer, and the people impoverished.

Most western nations also operated at full capacity for 3 decades or more following World War 2 and this just happened to be when national governments took responsibility to ensure aggregate demand was sufficient to generate enough jobs.

But let us be absolutely clear on this point. The STMs the underlying national accounting and stock-flows relations between the current government sectors and the current non-government sectors. They are not some prescription of a new world.

They are not “looking at Soviet Union as an economic model”. Where have I ever mentioned anything to do with the Soviet Union in the development of these models.

They are not a model of a “a collectivist, authoritarian state” although depending on the monetary system such a state adopted they may find themselves bound by the underlying national accounting and stock-flows relations that are described in the STMs. I would suspect, however, that the policy choices taken by such as state within such a monetary system would be rather different to those I would suggest given my understanding of how a fiat currency system operates.

The STMs also do not describe a “top-down management and full-employment” which apparently “is exactly what Billy advocates”. No he doesn’t. I am the only person who can tell you what I advocate.

If you want a clue as to my ideological persuasion is please go to the About page and see what my political compass score is. It is about as far away from this a “a collectivist, authoritarian state” with “top-down management and full-employment” as you can get.

I do advocate full employment strongly for many reasons.

No-one is ever out of work “because of productivity” which one commentator described as arising when “our economy produces what we need with less labour”.

The idea that if someone is unemployed they have to “create a new need (wash and fold laundry?), improve existing products, or re-enter the work force at a reduced rate” implies that employment is and all legitimate needs are created exclusively in the private sector. That is a violation of history.

Mass unemployment is a systemic failure to create enough jobs. The private sector never provides enough jobs to satisfy the demand for working hours from the willing and available workforce. There is only one other sector left to fill the breach – the public sector.

There are many areas of unmet need that the private calculus of profit will never meet. These are areas that can deliver substantial social benefits and which will only be produced if the public sector takes the initiative. They do not substitute activity for that already being performed by the private sector and add value to the community.

Please read my blog – Boondoggling and leaf-raking … – for more discussion on this point and it is related to the previous discussion of productivity.

After the accusations the the STMs were a communist front, some specific questions then appeared:

But why are your kids paying the same amount of tax that they were paying before their incomes fell? And what is happening to their expenses- are you charging them the same amount for food, rent, and utilities? If they are trading with each other why are the prices of trade-able goods and services not falling along with the supply of business cards? Perhaps the prices are staying high because China Family is spending the cards that they accumulated, buying up all of your kid’s Vegemite.

The tax rate was held constant so people could focus on the net government position only. Just a simplifying assumption that has no substantive relevance in the overall results.

There is no consumption in this model in order to focus on the national income accounting and the stock-flow relations between the government and non-government sector. We clearly need to understand those issues first and then complicate things later. Remember, the blog was entitled “walk before we run”.

There is only implicit trading within the non-government sector. The actual trading nets to zero and doesn’t alter the fact that transactions between the government and non-government sector do not net to zero and are therefore very important to understand.

There is no price level in the model – implied. There is an exchange rate but it is is unimportant in the accounting sense that I describe.

But the specific questions then fell back into the ideological issues:

You describe the economy: “there is no longer much work being done around the house. The garden is in a sorry condition and rubbish is piling up.” Why are your kids so lazy? Or is it that the Draconian Emperor (you as the govt) running the economy stubbornly refuses to bring their expenses down proportionately with income?

Like in the real world when employment falls productive output declines. It has nothing to do with laziness. Once a monetary system is imposed, laziness has nothing to do with anything. The demand for labour fell as I cut net spending.

Fiscal austerity programs do exactly the same thing and the STMs teach us the underlying impacts of such programs on the government and non-government sector.

Finally:

What happens when we introduce Arab Family who just discovered their house sits atop a geothermal energy source. They supply both your family as well as China family with heat and electricity. The winter is particularly cold and China family desires more heat so they send more of their spare cards to Arab Family in exchange for more heat. But Arab family only has a fixed supply and tells your family that they will have to either pay more for heat or get less heat. Your family would rather forgo a snack than be cold so they pay the higher price for heat. But now they have less to pay for Vegemite and so your kids are forced to go into your pantry so they can sell more Vegemite to China family so that they won’t have to go over the fence and earn back the purchasing power (work). In economic-speak, the inflation is eroding the purchasing power of your children and thus their quality of life sue to your resistance to any sort of restructuring.

As I have explained before an imported resource price shock amounts to a loss of real income for the nation in question. This can have significant distributional implications (as the OPEC oil price shocks in the 1970s had). How the government handles such a shock is critical.

But that takes the discussion far beyond what was intended when I wrote the STMs blogs. I think the failure of many critics to really just focus on discussing the national accounting and the stock-flow is telling. Launching off onto our favourite scare mongering may make one feel good but doesn’t contribute much to a reasoned discussion.

Once again I stress that modern monetary economics is descriptive and analytical. In that sense it takes no sides in ideological debates unless you want to get absurd and say that the “construct of money” or “employment” is ideological. Of-course they are but if we are going to get post-modernist then we won’t get very far in our understanding.

But we should be smart enough to separate the analytical detail I develop in my work from my opinions. Conflating them and then dismissing the former because you don’t like the latter is the tactics of scoundrels.

If you want to know my opinion as a person then ask me and I will either tell you or not depending how you ask and who you are and what sort of mood I am in. That is the nature of personal values and opinions and conjectures etc.

But if you want to learn about MMT and discuss it on its own terms then I welcome all input and I will do my best to help given my professional expertise in the area.

Someone – in a dismissive way – said my blog was just an ideological device. My response is that all blogs are ideological devices in that they are the expression of some person. That also doesn’t get us very far.

42 Responses to Questions and answers 2

thanks for attempting to answer some of my questions. i have a few pointed questions as follow ups:

in Q16, you wrote “No-one is ever out of work “because of productivity.” Can you explain that? As technological advances increase productivity, the need for jobs decrease.

Q15: you mentioned that if your kids dig holes and fill them in it wouldn’t change the STM, but quickly countered that you could think of many more imaginative things for them to do. At some point, isn’t it conceivable that you could run out of “productive” uses for your kids labor, and then reduce them to unproductive activities like digging holes and filling them in? At this point, why not just give them an allowance and let them have their free time to explore their creative artists within, rather than wasting their time with pointless labor. You’re not really saying that digging holes and filling them in is not pointless labor are you?

perhaps this question would be simpler: is the main goal of a JG program to give people income (it can’t be that – otherwise we’d just send them checks and let them stay home)? to give them something to occupy their time (that doesn’t seem right either)? in prior blog posts, some commenters have replied to me that jobs are to keep people busy. i strongly disagree with that notion, and i don’t think that’s the point of jobs in your model either.

i did read Boonoggling and Leaf Raking. this quote at the end caught my eye: “The Job Guarantee workers would have to get out of bed in the morning, prepare for work, then engage in meaningful value-adding activities.” You used the term “meaningful value-adding activities.” I agree completely, but how is this different from the term you attacked – PRODUCTIVE ? who determines what is meaningful and value added?

Pursuing the topic of banks and endogenous money, my image is that the recent crisis led to a loss of money in the private sector. Not net money, but the notional money that people had in their bank accounts which was being lent out to others, etc. and so on by the fractional magic, leading to the late bubble of debt. This has imploded, and needs to be replaced by infusions/spending from the currency issuer to make up for the lack of endogenous money. Would that be an accurate portrayal, in rough terms?

On the closed border question.. there is one exception to the sovereignty of the currency issuer, which is counterfeiting and fraud, by which other actors (North Korea comes to mind) can alter balances of payments without conforming to the stock-flow model.

On the “productive work” question, one might cite WWII as the ultimate in digging holes and filling them in again. Macro-economically, this worked wonders in the US. But it had some other consequences.

Bill,
I’m here in the States and have been trying to think of ways to expand your audience. I sent an e-mail to to one of our national talk radio hosts,Thom Hartman, to see if I could pique his interest. While he would no doubt consider himself a progressive, he non the less is convinced of the imminent demise of the dollar and the need for everyone to own gold. Who knows! Thought I’d give it a try anyway, and I would encourage other readers of this blog to do the same.
Thanks for your tireless efforts.

Bill says (Question 4) “The national debt is just the outstanding public debt held by the non-government sector (with some held by the central bank). It is a stock and reflects the wealth of the non-government sector held in this form.”
Strikes me there is a fundamental difference between two parts of the national debt: the monetary base and government bonds (Treasuries in the US).

I agree that the monetary base is “wealth of the non-government sector”. As regards bonds, these are also “wealth” in the eyes of those holding the bonds. But the rest of the population is obliged to pay taxes to fund the interest on these bonds. Arguably this is a liability, the capital value of which is equal to the value of the bonds. I.e. Treasuries are arguably not wealth for the US private sector: their worth is cancelled out by the latter liability.

Therein lies the beauty of Double Entry Bookkeeping and National Accounts.

Taxes to be paid in 2020 is not included in the private sector’s liabilities because this sector is yet to earn its 2020 income. Also, if we want to include some sort of “expected” taxes, we should also be including “expected” income, no ?

Double entry book keeping overcomes the chicken and egg problem. Neoclassical analysis, on the other hand gets into this problem, because “agents” are always maximising something/everything in their theories.

Usually I quote, but my questions are related to different questions, and I don’t think that quoting would add anything.

Question 1: In the private sector money is created by borrowing. Even though everything nets to zero, the money is in the economy until the debt is repaid. Right? So in the case of debts that are not repaid and are written off, is there not a permanent increase in money?

Question 2: Assuming that moderate inflation is a good thing, does that not imply that, over time, government debt should grow, or else money should be created without increasing the debt?

Many thanks. :)

P. S. Small complaint. I seem to be in some loop, where my submission does not go through, even though I keep a correct anti-spam answer. Perhaps it is as simple a thing as changing the answers at a slower pace.

Kid Dynamite: “At some point, isn’t it conceivable that you could run out of “productive” uses for your kids labor, and then reduce them to unproductive activities like digging holes and filling them in? At this point, why not just give them an allowance and let them have their free time to explore their creative artists within, rather than wasting their time with pointless labor.”

In hunter-gatherer cultures, which generally have more leisure time than industrial cultures, people do in fact engage in creative endeavors, and enjoy the fruits of their fellows’ creativity. There is no particular reason that we could not pay our fellow citizens to be creative, even if they would not be on national TV.

Bill: I appreciate that a government is not revenue constrained in the sense that it can and should print a certain amount of new money every year. But consider an economy, which for the sake of simplicity is at capacity, i.e. no more aggregate demand is possible without excess inflation, and where government in one year borrows $X instead of collecting $X of tax.

Also assume for the sake of simplicity that this change in funding is neither deflationary nor reflationary. Government then has to pay interest on the loan (say $Ypa). It cannot do this with newly printed money because demand cannot be increased. The money has to come from tax.

Alternatively, if the economy has some slack, and government is already engaged in the right amount of money printing to bring the economy back to somewhere near full employment, then the interest will again have to come from tax.

RAMANAN: Double entry book keeping is fine for businesses wanting to keep records and produce profit and loss accounts and balance sheets, but I’m not sure how good a guide it is to abstract esoteric stuff like the national debt.

Indeed, the point I made above is a nice illustration of this. I’ll explain – I accepted above that the monetary base is real private sector wealth. There is of course a debt corresponding to this paper asset, namely a paper liability: the entry for monetary base which appears on central bank’s balance sheets. But this is not a liability in the normal sense of the word: try going along to your local friendly central bank with a bundle of $100 bills and ask to have them repay their debt to you: they tell you to shove off. I.e. this “liability” is pretty much of a fiction.

As Willem Buiter put it “These base money ‘liabilities’ of the central bank are not in any meaningful sense liabilities, because they are irredeemable.”

In contrast, in the case of Treasuries, I guess if the double entry was all done properly, it would show up the liability I mention above (taxpayers’ liability to pay taxes to fund interest on Treasuries).

min – i ask again.. .is the point of a jobs guarantee program to just get people paid? is it to keep them busy? is it to have them do something “productive?” it seemed to me that the answer from MMT’s perspective was definitely not “to have them do something “productive,” but then Bill’s post on boondoggling closed with “engage in meaningful value-adding activities.” who determines meaningful value added?

There’s no inconsistency. The point is that (a) they should preferably do something productive . . . . that would be optimal, but if there are unutlized resources, then there may be no inflationary effect even if they aren’t doing something productive, while national output and productivity could actually be enhanced if the firms respond to increased demand by raising capital, etc.; (b) the problem with the term “productive” is that many who use it (not you, it appears) assume that private sector activities are by definition “productive” (though some even limit this to the for-profit private sector) and govt sector activities are by definition “not productive.” Where that is the case, then the term is not useful.

A few other points . . .

Regarding (a), “productive” for a jobs program should be determined in comparison to the opportunity cost, which in the case of a jobs program is involuntary unemployment. Therefore, the bar is set very low, as the existence of involuntarily unemployed mostly reduces overall productivity via crime, divorce, bankruptcy, and so forth (I have heard that virtually every social problem is affected in some statistically significant way by involuntary unemployment, though I have no citation; seems fairly reasonable to me).

Regarding (b), and to some degree (a), Warren Mosler always likes to note that government spending to build the Panama Canal increases productivity (and reduces aggregate prices), while government spending to blow up the Panama Canal would reduce productivity (and raise aggregate prices).

Kid D, I’d say that the point of a jobs guarantee program is to ensure that people can survive at times when the private sector doesn’t demand their skills. The state creates the entire framework that makes unemployment possible. The state is therefore obliged to relieve unemployment.

Implicit in your question “who determines meaningful value added?” is the belief that there exists some system where people don’t make such determinations. I challenge that this belief is true. Even in a so called “free market”, people make the decisions.

I’d much rather be free in a way where it was “one person, one vote” instead of “one dollar, one vote.”

1. There are people in society who would like to do more paid work (including because they are unemployed) then they are able to currently obtain in the private sector.

2. There is a public need (or want) as determined by the political process that needs fulfilling. This need could be building a road, a phone network, a port, a rail line, teaching kids to read, providing assistance to the disabled/elderly, land/marine rehabililation/conversation.

So as the JG is voluntary, it is no different to a private sector transaction in determining whether an activity is meaningful and value-adding.

So the point of the JG is that there are two parties with needs and they are coming together to fulful each others needs. If one party has a need for holes to be dug and filled back in, and the other party wishes to dig the holes and fill them back in, there is no issue. Whether you, Bill and I think this a meaningful valueadding transaction outside of our input through the political process is of no consequences, in the same way that my thoughts on the whether transactions you enter into with others is meaningful and value-adding, are of no consequence if they are entered into voluntarily, are legal, and impose no cost on those external to the transaction (e.g. pollution, noise)

I have a lot of posts to catch up with (it never stops), but meanwhile thanks for answering the EMU questions. I’ve been spreading the good word in continental European blogs, so these clarifications are definitely helpful. Some of the deficit terrorist that I dialogued with are beginning to show signs of panic. It’s quite fun, actually.

Question 7: in this “economy” if the kids declined to accept the government spending they would not be able to pay their taxes

This is exactly what happens in a lot of households when kids hit a certain age. “Johnny, you can start contributing to expenses here you you can find someplace else to live. The free lunch is over. Time to grow up.” :) or :( as the case may be.

Question 11: But the flows of net spending (deficits) can be endless as long as they promote real output and income growth and support private saving desires.

Just as an organism requires more nutrients as it grows, so too as an economy grows it requires more net financial assets in order to exploit real opportunities by expanding real output potential. Growth managed so as to be sustainable is potentially endless. Currency issuance that generates net financial assets promotes this if managed appropriately. Deficits are not a cost but a benefit that adds to productive capacity as long as nominal aggregate demand is balanced with real output capacity as growth takes place.

Again, it’s the government as household analogy that obscures this vital point.

Bill, this is really an excellent synopsis of the key fundamentals of MMT regarding the operation of the post-1971 monetary system:

What MMT tells us is that when a sovereign government spends it creates bank reserves (via central bank crediting reserves to bank accounts) which it at some future time collects as taxes and bond sales proceeds. This is what I have been referring above as vertical transactions.

We also know that when commercial banks extend credit (loans create deposits) these horizontal transactions net to zero because for every asset created their is an offsetting liability being held by someone else.

*******

The non-government sector overall cannot alter its net financial position by transacting internally. It can redistribute assets and liabilities within the non-government sector but cannot change the overall position.

Only transactions between the government and non-government sector can change the net financial position in the currency of issue of the non-government sector. It is crucial to understand that point if you want to really get to the bottom of the way the monetary system operates.

I imagine that if the economy were at capacity, the government might want to raise taxes to reduce aggregate demand – but it does not raise taxes to pay for debt interest. If you are saying that the government would not want to generate excess spending beyond its current level, it could still generate a deficit sufficient to maintain current spending plus pay bond interest. The question of whether bond interest generates additional demand is based on the composition of the debt. If it is held internally, it might generate demand, but you also have to consider the aggregate desire for savings. There are other factors than just the quantity of money that influence demand for real resources.

Surely, this ignores the role of the banking sector (which is lumped together with all other non-government sectors in the analysis).

Yes, all financial assets and liabilities created by the non-government sector net out to 0, but so what? It is the distribution of these assets and liabilities which is important, not the fact that they net out to 0.

One of the most neoliberal elements of the construction of the formal institutions of the European Union was when a common currency zone was established without a corresponding fiscal capacity at the same level.

From a neoliberal perspective, this is a wonderful thing, but in a real world perspective, what it does is incapacitate governments faced with a cyclical downturn.

So it is an important point to note about the Eurozone and the “Greek Tragedy” is that following Lisbon, the EU now has the ability to address the problem which, while not as fully capable as an ordinary fiat-currency-issuing core economy would be … is still substantially greater than the capacity they had prior to Lisbon.

The EU has a quite substantial borrowing authorization that most recently raised last year. Under qualified majority voting, it is now in a position to authorize the guarantee of Greek debt under whatever terms can gain support of a qualified majority.

But of course, if the EU guarantees Greek debt, the finance constraint faced by Greece as a quasi-provincial government will be substantially eased (how substantially depends on what terms are imposed).

Plus, yes I understand that the central bank liabilities are different. However, I think I do not understand why the “monetary base” is considered as national wealth by many. They are just settlement balances and many central banks use that terminology.

Where would the US be if the government didn’t put up the wherewithal that the private sector was/is unwilling or unable to fund? And then there are those pesky externalities that business generates that get socialized. Have you travelled in the Third World? In fact, you don’t need to. Watch what happens when the economy contracts and services are cut. Roads are not repaired, essential services are reduced, maintenance is deferred, and the quality of life begins to decline.

What I don’t think you see yet is that under a fiat system it doesn’t cost the taxpayers anything to do these things at the federal level and the federal government can also assist the states where their revenue falls short. Nor does it reduce incentive in the private sector. Nor is it unproductive. Government investment in public projects creates work that produces real assets and human improvements that increase the country’s wealth, competitiveness, and standard of living.

Moreover, we have a private banking sector that funds private investment. The government funds public investment. They are complementary systems. What’s the problem. Some people (Stephen Zarlenga) are even proposing that the US get rid of the private banking system altogether because it cannot be regulated and is constantly creating crises. What’s the advantage of the private banking system over government? You say that government would allocate funds politically. But the banking system allocates capital based on special interests and influence, too. If fact, the banks are one of the chief special interests influencing politics and policy-making, now.

In fact, I would prefer to see the federal government fund essential programs at the state level, too, reducing state tax burdens. The government just creates the wherewithal out of nothing, as it were. It has that power. A lot of things that could easily be done not only in the US but globally are not done simply because of “friction.” Government funding is like oil and grease, it reduces entropy. Under a fiat system, oil and grease are in abundant supply since it is just numbers on a score sheet that represents non-government net financial assets whose flow gets translated into expanding real assets. What’s the problem with facilitating wealth creation?

As long as government does not compete directly with the private sector for real resources, the expenditures result in improvements that assist the economy overall without impinging on the private sector or burdening the public with either higher prices or taxes — if economic policy-makers recognize the operational reality of a fiat system. Otherwise, the system continues to operate under the constraints of a convertible fixed rate regime, limiting policy options needless because of ideology. That’s “religion” not science.

The point that Bill makes over and over is that the government expenditures allocate real resources to public purpose and they do not create a financial burden on anyone in a fiat system. And they improve the economy rather than adversely affect it when these expenditures expand real output capacity through public investment. As Bill has shown, even transfer payments for public welfare benefit the economy by maintaining the workforce, just as do education and health care. After all, labor is a co-factor with production, and the fruits of production need to be purchased with income. Capital and labor are complementary factors. Just as the government steps in to preserve capital in crisis, so too it needs to do the same for labor in order to keep the economy in balance and growing sustainably.

Why don’t we do this? Largely because special interests believe that there is a fixed supply and they seek to redistribute it their way. Supply is not fixed but flexible. It can expand or shrink, depending on investment or divestment. Government in a key contributor to investment in areas that the private sector is either unable or unwilling to enter. Then government needs to step to the plate policy-wise, especially when the government is not financially constrained, unless voluntarily (politically).

Policy needs to be based on operational reality, not ideologically based theories whose assumptions are not empirical, or are even contradicted by empirical studies. (There’s a “battle of the titans” raging over at Nick Rowe’s place between the neoliberals and the MMT’ers over the multiplier, as we speak, if you want to see this in action. The simple money supply multiplier model and simple keynesian multiplier model)

Ramanan, vertical accounts can be said to be “fictional” in the sense that reserves are no longer real since convertibility was dropped. “Reserves” is a holdover from a bygone era and it is now an anachronism.

In contrast, horizontal accounts are “real” in the sense that income statements and balance sheets can be traced back to ledgers, and ledgers to journals recording transactions involving goods and services in the economy.

Accounting identities used in vertical accounting mirror accounting identities used in horizontal accounting, making them look similar, but they are vastly different with respect to their reference. Therefore, they should not be conflated. This is a more sophisticated example of the household-government finance false analogy, because people then think erroneously that the government “owes” something, or that government liabilities are credit-based when they are not.

The state creates the entire framework that makes unemployment possible. The state is therefore obliged to relieve unemployment.

This is a key point in appreciating unemployment and its consequences. When a society becomes primarily a surplus producing society through technological advances, subsistence living is no longer possible. Then, having a job that pays at least a subsistence wage is tantamount to subsistence under such circumstances. The Declaration affirms that everyone has a right to life. This is reiterated in the Preamble which establishes national purpose and goals, as well as in the Constitution and Bill of Rights as they have been interpreted to extend to human rights.

Managing unemployment is not a matter of largesse on the part of government but an obligation to honor, observes, and protect human rights. This extends globally as subsistence living is replaced in the Third Word through interaction with the developed nations. The developed nations then assume some of this responsibility. Human life is not an externality.

Kid: i did read Boonoggling and Leaf Raking. this quote at the end caught my eye: “The Job Guarantee workers would have to get out of bed in the morning, prepare for work, then engage in meaningful value-adding activities.” You used the term “meaningful value-adding activities.” I agree completely, but how is this different from the term you attacked – PRODUCTIVE ? who determines what is meaningful and value added?

The GOP, Eric Cantor specifically, has been claiming that the Recovery Act aka the stimulus, “has not created one new job.” Obviously, this can only be true based on what he means by “job.” If “job” is defined as private sector job involving production of goods and services, that is not even true.

Your question, “who determines what is meaningful and value added?” is therefore appropriate. Is this an ideological question or an empirical one? I submit that it is an empirical one, in that abundant economic, sociological, and psychological research shows that that it is more beneficial for workers to be engaged than unengaged. When the private sector is either unable or unwilling to hire the workforce, then it is the government that must step in. Who should decide what kind of employment the government should create? Again, this is an empirical question that can be decided based on hard criteria. Policy-makers need to think operationally instead of ideologically.

Let’s assume there is no gov’t other than currency and debt. That is G=0 and T=0. What would the model look like?

The cards are fiat currency.

If G=0 and T=0 and there were no other central bank transactions with the non-government sector then there would be no fiat monetary system. There would be no transfer of private resources to the public sector. That is the purpose of the STMs – to show how these transfers work.”

The cards are fiat currency. OK

Notice you put a qualifier in there (and there were no other central bank transactions with the non-government sector). To me this is the currency printing entity (central bank) “transacting” with the non-government sector.

I want to take away the currency printing entity from the gov’t (because of politicians) and take away the currency printing entity from the central bank (because of bankers and economists). All three of those groups might do things for themselves instead of the general population.

If I’m reading this correctly, it appears that the national debt is held onto. Doesn’t it usually get spent so that the government needs to earn back both the principal and the interest?

The national debt is just the outstanding public debt held by the non-government sector (with some held by the central bank). It is a stock and reflects the wealth of the non-government sector held in this form.

It arises because governments operating fiat monetary systems have hung onto gold standard practices to voluntarily constrain their spending – that is, they issue debt $-for-$ to match their net spending. The debt is not to “finance” their spending because they are not revenue-constrained.

From an accounting perspective, the stock of debt is an expression of the cumulative budget deficits that have been run by the government in past years. Budget surpluses work in the opposite way – to undermine the growth in wealth held in the form of public bonds.

Further, they only borrow back what they have spent anyway.

Please read my blogs – Debt is not debt and On voluntary constraints that undermine public purpose – for more discussion on this point.

The government never has to “earn” the principle or the interest it pays on outstanding debt. In a fiat currency system, public spending does not come from anywhere – in the sense, that there is a stockpile of funds they spend out of. The government neither has or doesn’t have any money. It is an inapplicable concept when related to a sovereign government.

A household has or doesn’t have funds because they are financially constrained.”

I think wealth/income inequality and positive price inflation targeting need to be added. Changes in retirement dates and/or other factors might need to be added too.

“The debt is not to “finance” their spending because they are not revenue-constrained.”

But is the gov’t interest rate constrained so that price inflation and wage inflation need to be avoided? Could excess savers “force” the gov’t to deficit spend with gov’t debt to prevent a recession?

In the STMs I made the point that: “If the budget is balanced there can be no net saving or net accumulation of financial assets”. This induced the following question.

Assuming no debt, does that mean there is no private spending either?

No it doesn’t assume anything about private spending. The non-government sector overall cannot alter its net financial position by transacting internally. It can redistribute assets and liabilities within the non-government sector but cannot change the overall position.

Only transactions between the government and non-government sector can change the net financial position in the currency of issue of the non-government sector. It is crucial to understand that point if you want to really get to the bottom of the way the monetary system operates.

So the STMs do not include private spending because it doesn’t shed light on the way the government can change the net financial position in the currency of issue of the non-government sector – which is the main purpose of the STMs.”

“I want to take away the currency printing entity from the gov’t (because of politicians) and take away the currency printing entity from the central bank (because of bankers and economists). All three of those groups might do things for themselves instead of the general population.”

Any group might do things for themselves instead of the general population. The answer is not to fantasize about a system that makes impartial decisions on its own – such a system doesn’t exist. The answer is to ensure the decisions are transparent and the group making them is fully accountable.

Dr. Mitchell – I fully agree with the Buffer Stock Employment Model [an expanding and contracting public workforce – with public and private sector employment working in concert] as the path to full employment. But vehemently disagree with the methodology [greater deficits] in facilitating – [clearly influenced by the alarming deficits we already have in the United States] and would offer as a more viable alternative to creating deficits for public employment, the following:

A federally mandated, private [non-profit] mutual insurance, owned by the employee, to provide the funds to hire/train our unemployed. Outlined in more detail at: http://www.Inclusivism.org

I am writing to learn of your input – response – agree, disagree – and if you disagree would be very interested in learning why. In the what ever it is worth, our Congress, as I write, is working on a comprehensive job creation bill to address our persistent 10% unemployment.

Jim, I took a look at your plan. Here are my thoughts. While I agree that the US has a capitalistic economy that is based on market solutions involving investment and consequent risk, it is a presumptuous to be begin with the notion that private solutions are superior to public. The private and public sector have different functions and operate on different principles. According to the Preamble, one of the functions of government is to promote the general welfare. The various department represented in the president’s cabinet pretty well reveal what these public areas of at least shared responsibility have been taken to be. In some areas, it has been determined that public-private partnerships work best. In others, the heavy lifting falls to the public sector largely because what is required the private sector is either unable or unwilling to provide.

Your proposal indicates that the private sector is unwilling to take on the task by requiring participation in the program. This unwillingness or perception of inability is almost certainly because the task is capital intensive, involves risk, and does not seem profitable. Your proposal requires the private sector to undertake this, which goes against the spirit of capitalism. Capitalism is based on voluntary risk-assumption in expectation of reasonable return based on commitment of capital. Business are not doing this because they don’t see it as in their interest. This is where government needs to step in.

If you investigate the proposal that Professor Mitchell and others in the MMT camp have put forward, you will discover that the conventional conception of macroeconomics being used in policy-making is deeply flawed because it does not appreciate the change from a convertible fixed rate monetary regime to non-convertible flexible rate regime when President Nixon closed the gold window on August 15, 1971. Since then, the household-government budgetary analogy no longer holds. Now the government is not financially constrained. The federal government neither “funds” expenditure through taxation, nor “finances” deficits through debt issuance. This opens but as yet unrecognized policy options operationally, not merely theoretically.

I am assuming you are shying away from the employer of last resort proposal because you think it will add to the deficit and increase the national debt in a way that is disadvantageous to the nation, even though the president, Congress and the Fed had no trouble allocating trillions to the financial crisis, assuming that government is the lender of last resort. The effect of high employment as the “new normal” is just a serious. You will see that it is not the case once that this plan is fiscally irresponsible once you appreciate the operational principles underlying functional finance. Not only can this policy be instituted to promote the general welfare while also improving the overall economic environment by recognizing the government as employer of last resort. But also much more can be accomplished as well in many other vital areas, such as health care, energy, and education — all vital to a strong and vibrant America in the 21st century. So I strongly urge you to investigate the economic thinking behind the proposal, which is operational and reality-based, and stands in sharp contrast to the current economic thinking, which is theoretical, relying on assumptions that are non-empirical and which led to the present morass. Moreover, the present thinking is simply erroneous when it come to understand now the modern (post 1971) monetary system actually works. The US and world vitally need this knowledge now, before the economy goes over the cliff due to operational ignorance that is avoidable. We don’t fight wars theoretically, but rather operationally.

Aren\’t net financial assets created when someone repaying a loan defaults? Doesn\’t the amount outstanding that they owe then remain in the system as a net financial asset? It will never be repaid and thus extinguished!

Not sure what you mean by the bank, as lender, defaulting. Do you mean a bank run?

Every financial asset is someone else’s liability; the asset and liability appear on the balance sheets of different entities. Changes to NFA on one entities’ balance sheet mirror changes to NFA on the other entities’ balance sheet, with opposite sign.

The only way that a sector can gain NFA is by interacting with another sector (which will lose NFA) so that the balance sheets of the two entities (one with the asset, the other with the liability) lie in different sectors. e.g. the government sector can run with negative NFA so that the private sector can “net save” with positive NFA.